Early-stage startups don't stand to benefit from Inflation Reduction Act, Kruze Consulting

The Inflation Reduction Act of 2022 doubles the R&D Tax Credit from $250,000 to $500,000, a popular tax credit used by unprofitable startups. However, an analysis by Kruze Consulting, a CPA serving VC-backed startups, shows that the earliest-stage startups will likely not benefit from this increased credit.

Vanessa Kruze, CPA and Founder, Kruze Consulting: "The increase in the R&D tax credit is welcome news, but most of our clients will not see a significant change in the size of their tax credits. We analyzed over 625 startup tax returns, and saw that less than 2.5% of early-stage startups spend enough on R&D to benefit from this tax credit increase. While 14% of Series B startups would be able to decrease their cash burn above the current $250,000 limit with this new legislation, only 1% of seed-stage companies and 9% of Series A companies will capture a higher R&D credit. Additionally, since the legislation doesn't address the gross receipts limit (i.e. companies that have made revenue for over 5 years or that have over $5M in revenue), as startups mature to the point where they will spend enough on R&D activities, they are very likely to no longer meet the basic qualifications for the credit."

Kruze's analysis of the R&D tax credit shows that most VC-backed startups' R&D tax credit is not limited by the $250,000 max-credit cap, but instead by how the credit is calculated. In particular, the credit calculation is essentially 10% of "Qualified R&D" spend - and most early-stage startups Qualified R&D expenditures are too low to provide more than a $250,000 credit.

"Just because the average startup won't get a $500,000 credit doesn't mean that startups should ignore this incentive," Vanessa says. "In fact, the average credit that Kruze clients get is between $50,000 and $60,000, and our clients have saved tens of millions collectively from this incentive. We strongly encourage startups to work with an experienced R&D tax CPA to review their R&D expenses and file for the tax credit if they qualify. We applaud Congress' efforts to help drive innovation in the United States by increasing the R&D Tax Credit amount. Startup founders should talk to their tax CPA to see if they qualify for this incentive, and they can estimate their startup's R&D tax credit with Kruze Consulting's R&D Tax Credit Calculator."

The refundable tax credit is applied against payroll taxes and applies to a wide variety of R&D expenses, including developing or improving products, processes, techniques, or software. The Inflation Reduction Act revisions apply the first $250,000 to a startup's employer social security taxes, and the next $250,000 to the employer's Medicare taxes.

www.kruzeconsulting.com